At this time last year, the cannabis industry could do no wrong. Marijuana sales growth projections were off the charts, and pot stocks were expanding their capacity and infrastructure as quickly as possible to gobble up early stage North American market share.
One of the many ways this expansion was expected to materialize, especially in the U.S., was through a flurry of merger and acquisitions (M&A). Between October 2018 and April 2019, more than a half-dozen sizable deals were announced in the United States, mostly among vertically integrated multistate operators (MSOs). These M&A deals were expected to be transformative by bolstering the retail and production presence of a number of well-known MSOs.
However, in recent weeks, many of these deals have been amended, or have flat out fallen apart.
MedMen backpedals on its PharmaCann acquisition
It started last month, when MedMen Enterprises (OTC:MMNFF) told investors it was shelving its acquisition of privately held MSO PharmaCann, marking the first time a notable cannabis deal wouldn't be completed.
When first announced in October 2018, the all-stock proposed acquisition was valued at a whopping $682 million. The deal was expected to double MedMen's presence from an existing six states to 12, as well as add more than two dozen retail licenses. Effectively, it was designed to make MedMen one of the largest MSOs by retail presence in the United States.
However, the deal collapsed just three days before the one-year anniversary of being announced. MedMen wound up citing four reasons it no longer felt the deal was prudent. In no particular order, MedMen blamed:
- Capital headwinds that are currently affecting the U.S. pot industry.
- The need to focus on core markets and not thin itself out by acquiring stores in non-core markets.
- The extended length of time regulators took to review the deal.
- The company's desire to focus on its omnichannel sales in its core markets, such as California and Florida.
Of course, MedMen has been losing money at an extraordinary rate in 2019, and taking on PharmaCann's existing locations, as well as the costs to expand its as of yet unopened retail locations, would potentially have put the company in a serious financial bind.
Curaleaf reworks its purchase of Cura Partners
Roughly three weeks after MedMen bowed out of its PharmaCann purchase, on Oct. 30, Curaleaf Holdings (OTC:CURLF) announced that it had worked with privately held Cura Partners, the company behind the popular Select brand of cannabis products, to amend the acquisition terms of their deal.
When initially announced at the end of April, Curaleaf agreed to hand over almost 95.6 million shares of common stock to buy Cura Partners, valuing the company at almost $950 million. At the time, it was the priciest deal ever announced in the United States. But it wasn't to be, with Curaleaf and Cura Partners now back-loading their combination, according to recently announced amendments.
Instead of handing over close to 95.6 million shares of stock, Cura Partners will receive 55 million shares of Curaleaf stock upfront, which is worth just shy of $293 million. The remaining 40.6 million shares from the original deal will be paid out to Cura Partners on a contingency basis. The contingency being that Select's extract sales have to top $130 million in 2020, with the 40.6 million share issuance maxing out at $250 million in 2020 extract sales. If Select's extract sales top $300 million next year, an additional earn-out of up to $200 million could also head Cura Partners' way.
While this looks like a great amendment for Curaleaf -- essentially making the acquisition more of a "prove-it" deal -- it just as easily could be construed as an admission that the company had initially agreed to grossly overpay for Cura Partners and its Select brand.
Cresco Labs and Origin House amend their deal
On April Fools' Day, Cresco Labs announced what looked to be a transformative deal to buy Origin House for about $823 million in stock. Origin House is one of a select few holders of cannabis distribution licenses in California, the largest marijuana market in the world by annual sales, meaning it'll provide Cresco Labs with instant access to more than 500 dispensaries in the Golden State once the deal closes.
When announced, the deal stated that Origin House shareholders would receive 0.8428 shares of Cresco Labs for each share of Origin House. But the newly amended agreement reduced this compensation to 0.7031 shares of Cresco for every share of Origin House. This values the new deal at closer to $263 million, down significantly from the original terms -- though both stocks have dropped considerably since the beginning of April.
It also requires Origin House to issue up to 9.71 million shares of its own stock in order to raise approximately $30 million. Marc Lustig, the CEO of Origin House, specifically noted that "the equity market environment has changed meaningfully since we first announced this proposed transaction," which suggests that this cash is more of a necessity for the combined company than simply a buffer at this point. It also follows a stock offering from Cresco just three weeks prior that raised close to $75 million Canadian.
The fact is that the marijuana M&A landscape in the U.S. is a total mess. With both Curaleaf and Cresco Labs amending their deals and MedMen shelving its acquisition entirely, the proof is in the pudding that already-completed acquisitions in the cannabis space were almost certainly grossly overvalued.